Business Context and Reporting Period
Company: KNOT Offshore Partners LP
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Quarter and six months ended June 30, 2018
Business Overview: The Partnership owns and operates a fleet of 16 shuttle tankers under long-term time and bareboat charters with major international oil and gas companies. As of June 30, 2018, the fleet included the recently acquired Anna Knutsen (acquired March 1, 2018). The Partnership is not under common control with its sponsor, KNOT, and accounts for acquisitions as asset or business purchases.
Key Financial Metrics
| Metric (in thousands, except per unit) | Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 |
|---|---|---|
| Total Revenues | $137,808 | $99,397 |
| Operating Income | $63,986 | $43,601 |
| Net Income | $52,405 | $28,344 |
| Net Income Attributable to Common Unitholders | $47,904 | $26,198 |
| Earnings Per Unit (Basic) | $1.465 | $0.886 |
| Cash Provided by Operating Activities | $78,234 | $98,021 |
| Cash and Cash Equivalents (End of Period) | $45,085 | $64,501 |
| Total Debt (Carrying Amount) | $1,117,045 | $1,033,330 |
| Available Liquidity | $58,100 | N/A |
Note: Available liquidity as of June 30, 2018, consisted of $45.1 million in cash and $13.0 million in undrawn revolving credit facilities.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 39% to $137.8 million for the six months ended June 30, 2018, compared to $99.4 million in the prior year. This was driven by the inclusion of five additional vessels in the fleet (Tordis, Vigdis, Lena, Brasil, and Anna Knutsen) and full earnings from the Windsor Knutsen and Raquel Knutsen which were off-hire or in drydock in the prior period.
- Profitability: Net income increased 85% to $52.4 million. This significant increase was bolstered by a $11.9 million unrealized gain on derivative instruments (interest rate swaps) due to rising US swap rates, compared to a $1.0 million loss in the prior year.
- Expenses: Operating expenses rose 32% to $73.8 million, primarily due to depreciation ($43.9 million) and vessel operating expenses ($27.2 million) associated with the expanded fleet. Interest expense increased 72% to $23.1 million due to higher debt levels from acquisitions and refinancing, as well as higher LIBOR rates.
- Insurance Recoveries: Loss of hire insurance recoveries decreased significantly to $0.5 million from $3.4 million in the prior year, as the prior period included recoveries for the Raquel Knutsen propeller damage.
Guidance, Outlook, and Risks
- Refinancing Activity: On September 4, 2018, the Partnership entered into new senior secured credit facilities totaling $375 million ($320 million term loan and $55 million revolver) to refinance existing debt maturing between late 2018 and mid-2019. This extends maturities to September 2023.
- Charter Extensions: Subsequent to the period end, Shell extended the Windsor Knutsen charter by one year, and Eni extended the Hilda Knutsen charter by four years.
- Distributions: The Partnership paid a quarterly cash distribution of $0.52 per common unit for the quarter ended June 30, 2018.
- Market Risks: The Partnership faces exposure to interest rate fluctuations (partially hedged via swaps), foreign currency exchange rates (hedged via forwards), and concentration of credit risk with major oil companies. The market for shuttle tankers is subject to oil price volatility and supply/demand dynamics.
- Capital Needs: The Partnership estimates approximately $29.4 million in drydocking and classification survey costs between 2018 and 2022.
Investor Verification Checklist
- Debt Maturity Profile: Verify the impact of the September 2018 refinancing on the debt maturity schedule and interest rate exposure (LIBOR + 2.125%).
- Derivative Valuation: Assess the sustainability of the $11.9 million unrealized gain on interest rate swaps, which significantly boosted net income but is non-cash in nature.
- Charter Expirations: Review the charter expiration dates for the fleet, noting that several vessels have options extending through 2022-2032, but some initial terms expire in 2019-2022.
- Liquidity Position: Confirm the $58.1 million liquidity position is sufficient to cover the $80.2 million in current debt obligations and upcoming drydocking costs.
- Related Party Transactions: Review ongoing fees paid to KNOT for technical management and administration, which totaled $3.5 million for the six-month period.